Gambling in Grain.

South Canterbury Times, Issue 7287, 15 August 1893, Page 2

Gambling in Grain.

{ The continued unprecedentedly low prices of wheat puzzle most people. When the figure fell to 35a per quarter experts declared that the bottom bad about been reached, and proved to demonstration that it could never fall below 32a, for the simple reason that at that price it would not pay anyone to grow wheat. But it hae long been below that level, and only exceptionally good parcels bring over 30s. This, too, ia in the face of very amall stocks being held, and a reduced area iu wheat. Bimetallists ascribe the low prices to the fact that in India and Bnssia the silver coinage is still worth its face value to the native farmers, and, being paid on a gold baeie, they really get some 30 per cent, more than the nominal price. But that argument cannot apply to the United States, which is still the largest exporter of wheat. Mr W. 0. Smith, lately a broker at Liverpool, baa (says the Napier Herald) published a little book to ! show that gambling in wheat “ futures ’’ is j the real cause of the low prices. Everyone j J knows how stocks and shares are gambled ini jon the Stock Exchanges. A man buys a lot { of, say, New Zealand 4 per cents- He does not lake delivery of any stock, bat at the next settling day pays or receives the “difference " —that is, the difference between the price quoted on the day ho bought and the price quoted on settling day. Precisely the same kind of gambling is carried on in connection with wheat, especially in the United States, but also in a less degree in England and the Continent. This is known as the M option ’’ or “ future" system, and under it fictitious crops are dealt with to an enormous extent, i The working of it is thus described : “ Men sell wheat or maize, nominally, without owning a grain, or even intending to obtain any, and others buy without expecting delivery. The settlement is one of price differences. Of course, delivery sometimes takes place ; but those who know the trade well declare that it does not ooqur in one case in a hundred sales of • futures.’ This is what our American friends call ' wind-selling,’ or * flat-selling,’ and in reality it is simply a method of gambling in the prices of commodifies. For example, in July A sells to B 10,000 bushels of No. 2 Bed Winter wheat, which he has not got, next September delivery, at 80c a bushel. While that contract remains open, for every change of price he takes or pays, on each settlement day (every day in most cases) the difference between the current price and 80c. The payments usually take the form of increase of the ‘ margin ’ which contracting parties have to pay into the clearing house by way of security. When the contract matures A can deliver to B the natural wheat, or B can demand its delivery. But in all probability B does not want the wheat, and A does not desire the trouble of getting and delivering it, so they settle up in accordance with the present price on the day of tha termination of the contract. If the pries has fallen 5c below 800, B will pay A that difference on 10,000 bushels, because A would bo able to buy the wheat to deliver at 750 a bushel. If the price has risen 5o above 800, A has to pay B 5c a bushel on 10,000 bushels because it would cost him 85c to buy the wheat for delivery. Now, the question comes: How does this system depress prices ? There are enormous fictitious sales, as it is said that fifty times the amount of the American wheat crop i 8 sold in the markets of the United States every year, and this makes an artificial glut in the markets. But on the other hand, there is an equal amount of fictitious purchasers, creating an artificial demand. How is it that the two do not neutralise each other ? Well, there are two mam reasons why they do not. The first ia .“ Bj ° rifcy of tbed <*lers in grain under the future system ore interested in » fall m prices ; and ths second is that the system creates frequent panics and a constant sense of insecurity, which must injure trade and depress values. But how is it that there are not as many traders interested in a rise ! 08 * fall ? , Because every seller of * options * or futures is interested in a fall, while most of the buyers of grain in America, and a great many of the importers in European countries, are also interested in a fall, it being their custom to hedge ’ their purchases by sales of futures. Suppose that an American owner of an elevator, or an English importer buys a large quantity of wheat at the price of the day. If ho former may wish to hold it for some time, and the latter must wait while it being transported. To guard against loss through passible fall in price, each of these men ‘ hedge ’ by selling • futures * ta ?? amount equal to bis purchase. Having hedged, the buyer is no longer intsrc|t»d it i

a rite, became for every advance he would keep on paying in respect to bis ‘futures,’ and in the and he must pay at least as much as be can receive in profit on the sale of bis grain when he gets it. On the other hand, if a great fall takes place, the buyer of grain may find the man to whom he has sold * futures’ be* gin to settle up and close the bargain prematurely, and then he will be able to secure a sub* •tantial gain and to make a fresh venture if the market turns temporarily in favour of the sale of another lot of ‘ futures.’ Jt is further urged that, under this system, a man of very small capital can buy extensively, because be can get credit from a banker or broker on his * futures.’ But, having bought extensively, he is often obliged to sell a ‘ future ’ immediately, and thus, being a ready seller, be helps to run down prices. Worst of all, however, is the second cause of the bad effect of the * option ’ or * future ’ system upon prices—the feeling of insecurity produced by it. Under the system there is a regular war fare, one man or clique trying to ruin another. All kinds of tricks are resot to in order to run prices up or down for some particular object. ‘Corners’ are formed, and while they are maintained there is a general fear of buying, lest they should suddenly be broken, and a great lob of grain should be thrown on the markets<”